Under GOP Tax Plan, Some Would Win in Real Estate—and Others Could Lose Big

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Love it or hate it, the Republicans’ tax plan is going to be yuuge—if it passes.

The Tax Cut and Jobs Act, which Republicans are hoping to pass before Thanksgiving, would overhaul the existing tax code—with major implications for home buyers, sellers, owners, and renters.

President Donald Trump has promised that the plan will be a boon to the middle class. But like just about everything in life, there will be winners and losers when it comes to real estate.

The winners are likely to be middle-income homeowners who live in moderately priced homes in the South and Midwest, where state and local taxes are also low.

The losers? Those who reside in the country’s most expensive, coastal cities, often in the bluest of blue states with the highest housing costs and local and state taxes.

Renters could also lose big, if rents rise as a result of fewer folks lining up to buy homes.

And while the very wealthy stand to benefit greatly under the revised tax code overall, the changes that relate to housing could hit them hard as well.

“Homeowners, and even some renters, in the most expensive markets will be hit hardest by the tax reform plan initially,” says realtor.com® Chief Economist Danielle Hale. “But as many of the deduction caps won’t rise with inflation, homeowners across the country will feel the pinch of these changes.”

The most expensive homes could become more expensive

Much has been made over the Republican tax plan cutting in half the cap on new loans qualifying for the mortgage interest deduction, which used to be $1 million. That means new homeowners wouldn’t be able to deduct any of the interest on loans above $500,000. Existing homeowners would be grandfathered into the previous deduction cap.

This means that a buyer with a $750,000 mortgage with a 4% interest rate could lose out on about $10,000 in tax refunds in the first year of the loan.

“Current policy … makes borrowing money to buy a house more attractive than other things,” says Andrew Hanson, an economics professor at Marquette University in Milwaukee. “But only for certain [wealthier] people.”

Folks in more affordable parts of the country, where this kind of money buys lavish mansions, may not exactly be crying for these buyers. But in places such as New York and California, the same chunk of money doesn’t go nearly as far.

For example, San Francisco buyers can drop $515,000 for a 540-square-foot, one-bedroom, one-bathroom condo. Meanwhile, in Iowa City, IA, the same hunk of dough can get a 4,155-square-foot, six-bedroom, 3.5-bathroom, single-family home.

Who’s claiming the mortgage interest deduction?

Now, only about a fifth of American tax filers (21.5%) claimed the mortgage interest deduction, netting an average $8,612 in tax deductions in 2015, according to the Pew Charitable Trusts.

And only about 5.4% of all of the mortgages made this year were for more than $500,000, according to real estate information firm Attom Data Solutions.

The highest percentage of these $500,000-plus loans made in 2017 were in Washington, DC, at 35.1%, according to Attom. The District of Columbia was followed by Hawaii, at 15.1%; California, at 11.5%; Delaware, at 9.3%; Massachusetts, at 9.1%; and Washington state, at 9.1%.

This could lead to more people in pricier markets staying put, rather than risking the loss of that deduction with the purchase of a new house.

“If you move and take out a new loan, you wouldn’t be grandfathered in,” says realtor.com’s Hale. “It incentivizes people to stay put rather than moving.”

And that could lead to even fewer homes on the market and higher rents if there are more folks competing for the same apartments and rental homes.

Plus, only primary residences would be eligible for the deduction if the plan passes. This means that vacation homes would become more expensive for buyers.

How important is the mortgage interest deduction?

But most folks aren’t thinking about the mortgage interest deduction when they’re buying a home. More likely, buyers are on the prowl for an abode because they’re starting families and need the space, or they’re tired of paying rent. Or it could be that they simply have decided that they want a home of their own.

The deduction “is not the No. 1 or even the top five reasons people become a homeowner,” says Daren Blomquist, a senior vice president at Attom. “It’s more of the icing on the cake.”

It’s important to note that only homeowners who itemize their taxes receive the deduction. And only about a third of Americans, homeowners and renters alike, itemize using expenses that qualify as tax-deductible.

The rest take the simpler standard deduction, which Republicans plan to double—making itemizing much less valuable. The standard deduction would rise from $6,350 for individuals and $12,700 for married couples filing jointly to $12,000 for single filers and $24,000 for married couples.

So under the Republican plan, taking the mortgage interest deduction wouldn’t be worth it unless the total of folks’ itemized deductions was greater than the new, higher standard deduction.

And while the plan is expected to do away with most of the itemized deductions we currently have, it will leave in place the deductions for mortgage interest, up to $10,000 in property taxes, and charitable contributions.

Homes could become cheaper

Capping the mortgage interest and property tax deductions could help to rein in runaway housing prices—particularly on the high end.

“Prices will not rise as fast in growth markets,” says Robert Strauss, an economics and public policy professor at Carnegie Mellon in Pittsburgh. “In some markets, they might fall.”

But buyers shouldn’t get too excited. Marquette’s Hanson cautioned these are likely to be extremely modest changes in the most expensive neighborhoods in the most expensive markets.

Homeowners may want to stay in their homes longer

Another much-loved current perk for homeowners is that if they sell their primary residences, they don’t need to pay taxes on the proceeds—that is, if they’re under a certain amount. Sellers can keep up to $250,000 if they’re single, or $500,000 if they’re married and filing jointly, provided they’ve lived in the abodes for two of the past five years.

Under the new tax plan, sellers will have had to live in the home for five of the past eight years.

“It’s not going to affect a ton of people because most people stay in their homes longer than that,” says realtor.com’s Hale.

Both first-time and existing buyers typically live in their abodes for about 10 years, according to the National Association of Realtors®. But it could make it harder for folks to trade up or down to a different home size, or to move if they need to relocate (by the way: they’d also no longer be able to deduct expenses for a work-related move).

Kiss your state and local tax deductions goodbye

Homeowners and renters alike would no longer be able to deduct their state and local sales and income taxes under the plan. They are expected to be able to take off up to $10,000 in property tax deductions.

That’s not so bad for states such as Florida and Texas that don’t have income taxes. But it could hit folks in other states with high taxes hard if they can no longer take them off their federal tax bills.

“States and localities depend on this as a way to mitigate the cost of raising taxes,” says Marquette’s Hanson. “If we take that away … [residents will feel] the full effect of that.”

States with high property tax rates, predominantly in the Northeast, will also suffer as homeowners would no longer be able to deduct anything over $10,000. The ones with the highest rates are New Jersey, at 2.31%; Illinois, at 2.13%; Texas, at 2.06%; New Hampshire, at 2.03%; and Vermont, at 2.02%, according to Attom Data Solutions.

And the caps on property taxes aren’t expected to go up for inflation over time. That means that as property taxes rise, it could hurt more homeowners.

“Local governments could shift their tax structures away from income and sales taxes, which aren’t deductible, and toward property taxes as one of those unintended consequences,” says realtor.com’s Hale.

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